very low income - Roth IRA contribution?

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Topic Author
vimukti
Posts: 7
Joined: Wed Feb 15, 2012 12:02 am

very low income - Roth IRA contribution?

Post by vimukti » Wed Oct 09, 2019 6:47 pm

My high-school sophomore son worked over last summer at a s/w company as an intern and made 11K. They offered 401k, so he contributed ~7K to that plan (Roth 401k) - with the goal to maximize the after tax contribution. I figured, since he will be in 10-12% tax bracket, maximize the after tax contribution - hence i gave that suggestion.

Of the 11K,
~7K is in Roth-401k, now rolled over to VG target fund in Roth Ira.

Q1. Can he still get to contribute to after-tax Roth IRA (5K)? There is a IRS clause that contributions can't exceed the earned income, but that doesn't clarify if that includes 401k+taxes contribution. Earned income is 11k
==> by this method, he could actually exceed the total income to be contributed to tax sheltered space (7K + 5k > 11K). It looks off.
Q2. If no, can be fund up 11k-7k = 4k(including the amount paid as tax to state/fed). I expect his taxes to be around 2.4k(fed + state)

Thanks,

fabdog
Posts: 743
Joined: Wed Jan 16, 2013 1:59 pm
Location: Williamsburg VA

Re: very low income - Roth IRA contribution?

Post by fabdog » Wed Oct 09, 2019 6:55 pm

the Box 1 number on his W2 will be the income. Since he did the Roth 401K as you note the earned income is $11K

So he can go for the full amount. The limit this year is $6K for persons under 50

Mike

ExitStageLeft
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Joined: Sat Jan 20, 2018 4:02 pm

Re: very low income - Roth IRA contribution?

Post by ExitStageLeft » Wed Oct 09, 2019 6:57 pm

He can make a full IRA contribution ($6k for 2019) this year. The only limitation is what is reported as wages on his W-2, which likely is $11k.

User avatar
Wiggums
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Re: very low income - Roth IRA contribution?

Post by Wiggums » Wed Oct 09, 2019 6:58 pm

The basic employee contribution limit for 2019 is $19,000. The $19,000 limit includes all elective employee salary deferrals, as well as any after-tax contributions made to a designated Roth account within your 401(k).

Since he earned less than $19,000, he is limited to his w2 amount before taxes and deductions. In this case, a total of 11k between the various account types.

Austintatious
Posts: 872
Joined: Thu Sep 13, 2012 7:01 pm

Re: very low income - Roth IRA contribution?

Post by Austintatious » Wed Oct 09, 2019 7:07 pm

Congratulations on directing your son down one of the roads to Dublin so early in his life. Here's a link to an IRS page that offers some insight.

https://www.irs.gov/retirement-plans/re ... tributions
Last edited by Austintatious on Wed Oct 09, 2019 7:35 pm, edited 1 time in total.

Topic Author
vimukti
Posts: 7
Joined: Wed Feb 15, 2012 12:02 am

Re: very low income - Roth IRA contribution?

Post by vimukti » Wed Oct 09, 2019 7:08 pm

Oh, i was surprised how fast and easily he absorbed asset-allocation(some parts), index funds and Roth IRA concepts - the value of tax exempt space.
Thank you all; Roth-Ira - here i come.

Morik
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Joined: Tue Nov 25, 2014 12:26 pm

Re: very low income - Roth IRA contribution?

Post by Morik » Wed Oct 09, 2019 7:09 pm

Wiggums wrote:
Wed Oct 09, 2019 6:58 pm
The basic employee contribution limit for 2019 is $19,000. The $19,000 limit includes all elective employee salary deferrals, as well as any after-tax contributions made to a designated Roth account within your 401(k).

Since he earned less than $19,000, he is limited to his w2 amount before taxes and deductions. In this case, a total of 11k between the various account types.
The $19k limit is not applicable to IRAs. This info is correct for 401ks, though.
See https://www.irs.gov/retirement-plans/pl ... tributions and https://www.irs.gov/retirement-plans/pl ... ion-limits (which the first link links to).

The IRA can be funded with the full $6k, as the earned income for the year was >= $6k.

lakpr
Posts: 2748
Joined: Fri Mar 18, 2011 9:59 am

Re: very low income - Roth IRA contribution?

Post by lakpr » Wed Oct 09, 2019 7:19 pm

+1 to Morik's explanation. That is the beauty or quirk, depending on your view point, of low earnings in our tax code. Low earnings encourage Roth contributions to both 401k and IRA, but neither contribution reduces income. So technically you can earn more than $6000 but less than or equal to $19000, yet you can contribute 100% of your earned income to Roth 401k, and additional $6k to Roth IRA. Total Roth contributions more than the earned income.

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